Hardships of Ethanol

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Everywhere we look we are facing rising prices. We find them at the gas pumps and now we see them at our supermarkets. Food prices are climbing, and just like gas prices, they are having broadly felt adverse effects on Americans.

The Wall Street Journal sat down with C. Larry Pope, the CEO of Smithfield Foods Inc., the world’s largest pork processor and hog producer by volume, to discuss the rising food prices and how they are affecting his business. Pope attributes the increase in food prices to corn prices and the ethanol industry:

It’s also a business under enormous strain. Some “60 to 70% of the cost of raising a hog is tied up in the grains,” Mr. Pope explains. “The major ingredient is corn, and the secondary ingredient is soybean meal.” Over the last several years, “the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago.” Which means every product that uses corn has risen, too—including everything from “cereal to soft drinks” and more.

It is also important to note that, while Pope does not go into great detail, he points to the depreciating dollar as playing a role in inflated food prices.

Pope says the majority of his customers will be hurt by rising food prices:

“Maybe to someone in the upper incomes it doesn’t matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is,” he says. “But for many of the customers we sell to, it really does matter.” Workers can share cars when the price of oil rises, he quips, but “you can’t share your food.”

As food prices rise, what are most people expected to do? Many are on a limited budget and where will they cut back? Increasing food prices may also result in people turning to cheaper less nutritious food. Lora Iannotti, public health expert and professor at Washington University in St. Louis, explains how rising food prices lead to nutritional problems for everyone—especially the most vulnerable:

“During a food price crisis, households moved away from ‘luxury’ food items such as meat, fish and dairy products to poorer quality food,” she says.

Data from nationally representative household budget surveys show that during a food crisis, calorie intake is reduced by an average eight percent from pre-crisis levels, equally affecting rural and urban areas.

“We are particularly concerned for families with young children,” Iannotti says. “When you have a reduction in calories and critical nutrients for kids under 2, there are long term consequences such as stunted growth, cognitive deficits, lower educational attainment, and reduced future productivity.”

Like many other critics of the ethanol subsidy, Pope calls for an end to these subsidies. That would be a significant aid to reigning in the high food prices:

…Mr. Pope says, get rid of the ethanol subsidies and the tariff. “I am in competition with the government and the oil industry,” he says. “It’s not fair.” Smithfield’s economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn’t subsidized. “Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case,” he says. Imagine what would happen if the mandate and tariff were eliminated, too.

Gary Wolfram, economics and public policy professor at Hillsdale College, offers a similar message. Wolfram points to the sharp increase in food prices, the inefficiency of corn ethanol, and calls for the end of ethanol subsidies:

World food prices are on the rise. In the United States, retail food prices rose .6 percent in February and are up 2.3 percent from February of 2010, the highest 12-month increase since May 2009. Part of the reason for the revolutionary fervor in the Middle East is rising food prices. Yet our government provides a $6 billion per year subsidy to turn the U.S. corn crop into gasoline. Ever gallon of ethanol refined into gasoline receives a 45-cent per gallon subsidy.

[…]

But this inefficient use of corn does more than just cost taxpayers’ money. It is part of the problem of increasing food prices. Ethanol makes up about 8 percent of U.S. fuel for vehicles, but uses up about 40 percent of the nation’s corn crop. The Economist estimates that if all the American corn crop that goes into ethanol were used as food, global corn food supplies would increase by 14 percent.

And as an article in Investors.com argues, ethanol has failed to achieve many of the goals that its proponents claim it would achieve.

Acton’s criticism of the ethanol subsidy is not new. In 2008, Ray Nothstine was interviewed and articulated the moral problems with the ethanol subsidy, the unintended consequences, and inefficiencies of ethanol that are now coming to light. Readers can listen to the interview here.

Rising food and gasoline prices are causing people to bear economic hardships, and, with limited household budgets, these trends cannot continue. Many leaders and economists are correct in calling for a reevaluation of our ethanol policy.

Comments

So much corruption surrounding ethanol! Newt Gingrich has taken ethanol money. Gore supported ethanol when he was running for president and recently admitted his folly. B.Clinton who had money invested in an ethanol plant in Brazil that engaged in slave labor, recently rejected ethanol. Bush put the high levels of ethanol mandate in place. It goes on and on.

The sad thing is it looks like this problem is going to continue with the new trend in reporting on ethanol. Finally, most news outlets are reporting that corn ethanol has problems— inefficiency, land use issues, waterway pollution, food security/inflation, etc. The new narrative is that cellulosic ethanol is the real answer and corn ethanol has been sucking up all the subsidies. If we just give cellulosic “the capital” we will have cheap “homegrown” energy for all.

Cellulosic ethanol has received subsidies and has been unsuccessful. Look at Vinod khosla’s Range Fuels and Cello Energy. Range Fuels has gotten about 162 million in tax-payer dollars and about the same in private funding, but has not produced the cellulosic ethanol it promised. WSJ reported that the Range Fuels CEO says that no one has figured out how to produce commercially viable portions of cellulosic ethanol. And Cello Energy is bankrupt. (See WSJ 2/10/11 The Range Fuels Fiasco) (enchantingethanol.blogspot.com)

Overall a great post. One wonders how long it will be before Americans recognize that the vision of a corn-fueled future is chimeric.

Not quite sure I’m buying Ms. Ianotti’s argument that:

“During a food price crisis, households moved away from ‘luxury’ food items such as meat, fish and dairy products to poorer quality food…We are particularly concerned for families with young children…When you have a reduction in calories and critical nutrients for kids under 2, there are long term consequences such as stunted growth, cognitive deficits, lower educational attainment, and reduced future productivity.”

Given the relatively poor diet enjoyed by my grandparents (and virtually all of their peers in rural AR) in conjunction with their faaaar greater academic accomplishments, it’s especially difficult to buy the “cognitive deficits, lower educational attainment, and reduced…producitivity” arguments.

J.E. Rendini

How many of our problems would be solved or significantly ameliorated by 1) removing all ethanol subsidies and mandates; 2) permitting oil drilling offshore and in Alaska; 3) launching a serious effort to build a new generation of nuclear powerplants; and 4) rebuilding and expanding our Navy and Air Force and adding two divisions to the Army. Nos. 1 and 2 would actually make money and nos. 3 and 4 could have been done for less than the stimulus bill, which as far as I can see has produced nothing.

And with regard to children’s nutrition, we’ve been neglecting that for years. It’s not ethanol policy that’s making our kids fearful, cynical, fat and stupid. It’s killing their siblings, breaking up their families and sending their mothers to work, and shunting them into daycare and unionized government schools. I’m surprised they come out as well as they do. It’s the damned persistent human spirit; you just can’t crush it completely.